Good growth prospects, but the fiscal outlook is challenging



  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

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GDP USD330,23bn (World ranking 39, World Bank 2018)
Population 49,65mn (World ranking 29, World Bank 2018)
Form of state Presidential Republic
Head of government Iván Duque
Next elections 2022, presidential
  • Natural resource base: agricultural, energy and minerals
  • Strong medium-term growth
  • Pro-business environment
  • Fiscal sustainability principle included in the Constitution
  • Support from international financial institutions
  • Independent monetary authorities
  • Sensitive to commodity price fluctuations and the U.S. business cycle
  • Difficult security situation with long running domestic insurgency and drug trafficking
  • Rule of law and control of corruption remain areas of concern
  • High informality in the job market
  • Skewed income distribution

Healthy economic growth, new investment opportunities

Over the past few years, Colombia’s GDP growth was hit by the severe oil price shock between 2014 and 2016 and weakening demand from regional partners. Then it was capped by the rise in VAT in 2017 from 16% to 19%, which weighed on private consumption. After growing +2.1% in 2016 and a meager +1.4% in 2017, the economy accelerated in 2018 (+2.7%) on the back of stronger commodity prices and a post-election confidence boost.

First quarter economic growth in 2019 disappointed, but we see room for acceleration in H2. We expect inflation and monetary policy to remain supportive in 2019. Spending will be tempered by weak consumer confidence; unemployment, which reached a more than two year peak in February at 11.8%, went down but remains above 10%. Yet, in H2 2019, the privatization drive planned in the USD350 billion National Development Plan ratified by President Duque in May 2019 will allow the Colombian government to sell its shares in more than 100 companies in the energy, telecommunications, transport and finance sectors, where it holds stakes of up to 49%. The government plans to raise USD1.86 billion (0.6% of GDP) per year until 2022. Hence Euler Hermes expects the Colombian economy to grow +2.5% in 2019 and 2020, after +2.7% in 2018, supported by decelerating inflation, which still props up consumption; stable oil prices on average in the next two years and higher investment with the privatization drive.

Over the next decade, aging oil reserves and a lack of new discoveries will drive the need for economic diversification as revenues from that sector decrease. This is likely to encourage successive governments to adopt policies that promote non-hydrocarbon investment. President Duque’s government has focused on implementing a dual agenda: supporting “unconventional” oil extraction (hydraulic fracturing, fracking), in order to triple oil reserves, while developing the so-called “orange” cultural economy.

After six straight years of increases, company insolvencies could drop by -10% in 2019 then stabilize. However, the annual number of company insolvencies should remain at a historically high level. The amendments to the insolvency law (2013) have kept pushing up insolvencies and delaying the gradual normalization we expected. This is mostly due to a surge in reorganizations rather than liquidations.

Monetary policy is deemed moderately expansionist by the central bank, with the policy interest rate maintained at 4.25%. We do not forecast any new rate cut this year, as the bank has expressed concerned about labor market developments, and since inflation, while within target, accelerated and remains above the target midpoint (at +3.4% y/y in June, up from +3.0% in February). This should support the ongoing credit recovery.

Twin deficits are still the main vulnerability

Colombia’s fiscal outlook is mixed, as evidenced by the two opposite moves of Fitch, which downgraded its outlook for the country from stable to negative, and Moody’s, which upgraded it from negative to stable in May. The country’s main challenge is maintaining budget discipline after passing a fiscal law slashing taxes on corporates, amid the Venezuelan migrant inflows and declining revenues from the oil sector. Colombia’s 2011 fiscal rule sets a deficit goal of 1% by 2027. While the government reached the deficit target in 2017, it eased the 2018 and then the 2019 targets (from 2.2% to 2.4% for the latter). The budget for 2019 was passed by the previous administration of President Santos, and now results in a USD4.4bn deficit. Yet the reform proposed by President Duque to bridge the gap was watered down.

What does the fiscal law include? A tax break on investment in some tech and cultural sectors; a corporate tax break from 33% to 30%, smoothed over four years and a lower VAT on capital asset investment. It also hikes taxes on high income real estate and introduced a simpler tax system for low-income individuals. The central bank has estimated that the law will still require an adjustment in public finances worth between 0.5% and 1.1% of GDP, mostly as a consequence of 2020 corporate tax breaks, as the bill does not go as far as intended by the government initially, especially with regard to raising additional revenues. Not to mention the more than 1mn Venezuelans living in Colombia (800,000 of which arrived there last year), requiring a boost in social spending. Recent estimates put the cost of integrating the Venezuelan immigration at 0.5% of GDP per year.

As for the external sector, the current account is still rebalancing after the oil price shock of 2014, but the current account deficit as a share of GDP struggles to improve beyond -3%. As of January 2019, it stood at -4.2% of GDP (over four quarters), its highest level since October 2016. The slowing of the US economy will not help the trade balance (as the US is Colombia’s main trade partner, receiving 34% of its exports), not to mention the bleak regional growth outlook. Two key elements somewhat mitigate external risk: the commitment to pro-business policies and external buffers. The current account deficit is entirely covered by net FDI inflows (97%). External debt is reasonable (38.2% in 2018) and import cover is comfortably above nine months.

Still strong business environment and policies heading in the right direction

Colombia has strengthened its macroeconomic fundamentals since the early 2000s, thanks to sound macroeconomic policy reforms. This was due to the adoption of (i) a credible inflation targeting regime, (ii) a freely floating exchange rate, (iii) a structural fiscal rule and (iv)  solid financial regulation. According to the World Bank’s Ease of Doing Business survey, Colombia ranks 3nd in Latin America (65 of 190 worldwide), losing its second place in the region to Chile (with Mexico ranking first). The peace agreement with the FARC set the stage for positive developments in the security environment. Yet, shortcomings remain in the areas of rule of law, control of corruption, enforcing contracts and paying taxes.

After the peace agreement with the FARC by the previous administration, the tougher stance of the current administration has increased political and security risks. However, we do not see President Duque effectively dismantling the agreement.

Trade structure by destination/origin

(% of total)

Exports Rank Imports
United States 34%
27% United States
China 6%
20% China
Venezuela 4%
8% Mexico
Ecuador 3%
5% Brazil
Spain 3%
4% Germany

Trade structure by product

(% of total)

Exports Rank Imports
Crude Oil 32%
8% Refined Petroleum Products
Coals 13%
6% Cars And Cycles
Other Edible Agricultural Prod 10%
5% Telecommunications Equipment
Non-Monetary Gold 7%
4% Plastic Articles
Refined Petroleum Products 5%
4% Pharmaceuticals

The payment behavior of domestic companies has been deteriorating, with DSO remaining high and late payments occurring frequently.

  • Low

  • Medium

  • Sensitive

  • High

  • Payments

  • Court proceedings

  • Insolvency proceedings

Procedural costs and delays are significant, so court proceedings should be avoided overall. On the other hand, the court system has too many requirements in order to accept security titles.

When it comes to insolvent debtors, collecting debt is a genuine challenge and, overall, negotiating payment during the pre-legal action phase remains the most efficient alternative.

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Collection complexity Colombia

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Contact Euler Hermes

Economic Research Team

Mahamoud Islam

Senior Economist for Asia

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